Treasury Auction Disappoints as Yields Surge Amid Market Selloff

Treasury Auction Disappoints as Yields Surge Amid Market Selloff 

On a day when stocks are plunging, driven by the sudden recognition of rising yields, expectations were high for today's reopening of the 20-year Treasury auction, specifically for the 19-year, 10-month Cusip UD8. However, the auction didn't live up to those expectations.

The high yield for the auction came in at 4.590%, a significant jump of 55 basis points compared to last month's 4.039%. This marked the highest yield since May and came in slightly above the When Issued (WI) yield of 4.574%, trailing it by 1.6 basis points. Though the tail was smaller than the previous month's 2.0 basis points, this was the second consecutive auction to experience a tail, which is generally a sign of weaker demand than anticipated.

The bid-to-cover ratio, which measures demand by comparing the total bids to the amount of debt available for sale, was a respectable 2.59. This was an improvement from last month's 2.51 and represented the highest ratio since July's 2.78. However, it still fell short of the six-auction average of 2.64, suggesting that while demand was solid, it wasn't exceptional.

Looking at the breakdown of bidders, the internals were decent but not spectacular. Indirect bidders, a category that typically includes foreign central banks and other institutional investors, took down 67.9% of the auction. This was an improvement from last month's 65.1% but fell short of the recent average of 72.8%. Meanwhile, Direct bidders, which include domestic money managers, were awarded 17.6% of the auction, leaving Dealers with the remaining 14.5% of the final allotment.

In summary, while the auction wasn't a disaster, it could hardly be called a strong performance either. The internals were respectable but not outstanding, and the auction failed to provide any relief to the broader market, which has been experiencing relentless selling pressure in recent days. This selling has been driven by the market's growing realization that the era of low yields is ending, and the prospect of higher inflation under a potential new political environment is becoming more likely. The term "Trumpflation," which had been used in the early days of the Trump administration to describe the potential for inflationary policies, is now being reconsidered as the market adjusts to the possibility of a political shift that could see a "Red sweep," where the Republicans gain control of both the executive and legislative branches. This prospect has led to a repricing across the yield curve, as investors brace for a period of higher interest rates and inflation.

As the market begins to retrade on this potential shift in the political landscape, today's auction did little to ease concerns. Instead, it reinforced the ongoing trend of higher yields, as investors demand greater compensation for the risk of inflation and rising rates. The mediocre outcome of the auction, combined with the broader macroeconomic environment, suggests that the bond market is likely to remain under pressure in the coming days and weeks, as the market continues to adjust to a new reality of higher yields and potential policy changes.